It is going to be one busy week for the markets, with the CPI and PPI reports, along with 10-Yr and 30-Yr auctions.
CPI will be released on Wednesday and is expected to have risen by 0.2% m/m and by 8.1% y/y in April. PPI will come on Thursday, and it is expected to have increased by 0.5% m/m and by 10.7% y/y.
The 10-yr auction will arrive on Wednesday at 1 PM ET, and the 30-Yr auction will be on Thursday at 1 PM. The auctions have become must-watch events, as they can be market moving these days.
Many people think the market is going back to an all-time high based on numerous forms of technical analysis or other methods. In my opinion, I don’t see how that’s possible any time in the near term, given the plan the Fed has laid out.
1. Fed, QT, And Liquidity - Or Lack Thereof
There are only four words you need to tell yourself every day you wake up, DON’T FIGHT THE FED. The FED is working to do two things to make it very difficult for the markets to go to new highs: tightening financial conditions and will now drain the balance sheet.
The Fed hasn’t even begun to reduce the balance sheet, and reserve balances are already falling. One reason why balances are dropping is that QE stopped.
The second reason is that the overnight reverse REPO operation increases nearly daily, which drains liquidity from the systems. The final reason is that the US Treasury removed a massive amount of money from their general account held at the Fed.
The reverse Repo activity isn’t likely to subside; I think it will continue to increase as the Fed has raised the interest rate on the facility to 80 bps.
Separately, the Fed has now announced that QT will begin in June. That means less liquidity will be available to go into the stock market in the form of margin and leverage.
Additionally, financial conditions are tightening, and they will only continue to tighten because that is what the Fed WANTS to happen. Tighter financial conditions create stock market volatility and generally push those prices lower over time.
These factors have a tremendous impact on the liquidity in the stock market, creating very wild moves Intraday.
This past week we saw that volatility created a colossal trading range. A bear flag pattern formed in the SPDR® S&P 500 (NYSE:SPY) starting on Apr. 21 and is now very close to a significant breakdown.
I think once support breaks around $405, the SPY will be on a path lower, with the next stop to come around the $385 to $387 region
2. Intuit
Also, a significant negative this week is that several market leaders have finally broken key support levels. With these levels breaking, it would indicate that the market is likely to break essential support.
Intuit (NASDAQ:INTU) is one such example after it fell below $420. With that critical level broken, the next support region may not come until $360.
3. Amazon
Amazon.com (NASDAQ:AMZN) is breaking down, and this week it fell below $2,450 and is now testing support around the $2,260s. There may be a good chance for Amazon to reach the gap of around $1910 in the weeks ahead. Gaps love to get filled, and there isn’t any reason for the stock to rise these days.
4. Microsoft
Microsoft (NASDAQ:MSFT) is a stock facing a steep drop, but has held firm, with $270 the key here. If that level of support at $270 cracks, there is nothing to keep MSFT from dropping into the mid- $240s.
5. NVIDIA
The NVIDIA (NASDAQ:NVDA) implosion continues and probably isn’t even close to over yet; with support, around $180 looking fragile. The chart suggests that NVIDIA may be destined to trade below $140.
6. Advanced Micro Devices
The gaps in Advanced Micro Devices (NASDAQ:AMD) between $60 and $75 are just screaming to be filled, and if the mid-$80 region can finally break, that is probably the next place AMD heads directly.
7. Zoom Video
Zoom Video (NASDAQ:ZM) has been a great overall indicator for the market, and if it breaks below $94, we know the next leg lower in the market has started.
This week’s free YouTube Video: